Getting Acquisition Ready

Even if your company is not preparing for an acquisition, the company should always be acquisition ready. What that essentially means is: (1) the company should always be mindful of de-risking and mindful of its corporate affairs: the company should be clean and clear from a corporate legal perspective and risk perspective; and (2) the company should have a business plan and be ready to adapt to the market: the company should be considerate of both its short-term and long-term goals regarding how it intends to succeed in the marketplace and stand out from competitors and ready to pivot when necessary. Founders who focus on an exit strategy from day one may be missing the mark, however. Often, it’s those with a passion for solving a particular problem who will succeed because their efforts are focused on just that, rather than some other result. Acquirers and investors who are sophisticated are likely to perceive the difference. Regardless, it’s important to be thinking about business strategy, including goals and targets and yet remember to be agile and responsive to the market. If something isn’t working, it may be time to reconsider certain solutions to the problem you’ve intended to solve through your business. Being stuck on a particular approach when there isn’t product-market-fit, can be not only detrimental but fatal.

Being acquisition ready means many things but ultimately it means being a vigorous advocate for the company vision; being passionate about the business cause and solutions and being able to adjust, adapt and overcome obstacles along the way, all while working to mitigate risk. Demonstrating that means your business is more likely to succeed. On the diligence side of things, being acquisition ready means having all of your books and records in order; ensuring your cap table is properly papered (or company ownership is properly and clearly papered); ensuring your intellectual property assets are wholly owned or properly licensed and protected in writing; ensuring your filings have been made on time; having clear written commercial agreements; your financials are well tracked, evidenced and can stand up to audit; paying and filing taxes timely; maintaining necessary insurance policies; maintaining board and shareholder minute books if the business is a corporation and checking the box on basic other corporate formalities. Additionally, registering for trademarks can be part of the protections mentioned above and including performing a search early on before embracing a specific brand and logo where infringement could be a risk. All mitigation of risk is important. Acquirers will understand, however, certain risks, such as that many businesses may have debt on the books or certain employment or labor issues and sometimes litigation issues. While it’s best if those things can be avoided, it’s also often expected, and the risk is instead analyzed with an eye to how the business is addressing those obstacles and how many and how large the related liabilities are. Settling liabilities and papering settlements appropriately is often better than “letting sleeping dogs lie”, but this may not apply in every scenario. Unknown or uncapped liabilities make for larger holdbacks in acquisitions and unresolved issues often are the basis for line-item indemnities where sellers must protect buyers from such liabilities. It’s in all parties’ interests, therefore, to not let disputes remain unresolved, in most cases. Sometimes a small dispute can turn into a large dispute when a counter party learns of an acquisition (either already completed or a pending acquisition). The claimant comes to understand that it has new leverage in the context of the deal to get a better resolution than perhaps before and a sleeping dog can become a hungry lion!

Settling liabilities and papering settlements appropriately is often better than “letting sleeping dogs lie”, but this may not apply in every scenario.

It’s easy to focus on day-to-day operations and forget some of the formalities. If you want to keep your company acquisition ready (and financing or funding ready, as needed) and generally set it up for success (mitigate risk and stay on track), you want to remember to fit in time to keep up with basic protections. Much like taking out an insurance policy, properly papering your business matters can make all the difference when it comes to costs and liabilities and creating that unfair advantage against competitors. Otherwise, companies often end up paying a multiple of what they would have paid, to clean up problems later. At Rogoway Law we can help you manage those formalities in a cost-efficient manner and take some of those concerns off your plate so you can focus on your business operations.

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